If you have a buddy standing over your shoulder during your example search, do you still expect to maintain absolute privacy?
Good example! I've asked people to turn away while I type passwords. I instinctively turn away when people are typing passwords or entering their PIN at the ATM. As for search, I've never been in this situation, but imagine I suspect I have some disease or ailment that I don't wish to make public. Would I search for info on it while others are around? No! If a friend and I are discussing something and a net search would yield important info for our discussion, I would bring my laptop to them and start searching.
I think this thread has helped me articulate something that I didn't know I had decided deep down (thanks for all the good minds who've contributed - it's your fault

): sharing of personal data is not inherently bad as my CC example and as Ron's Apache logs example show. BUT, for the sharing to take place in a trusted environment, I think two conditions must be met for me, Pierre, to be happy:
1. There needs to be a reason why the tracking and sharing is taking place. The reason needs to be good and have tangible positive effects. Example, CC company tracks my usage, but that's because I want to see an itemized bill. Would you trust your bill if it weren't itemized? I suspect not.
2. The fact that tracking and/or sharing is/are taking place needs to be clearly communicated, and also full details of what is being tracked and for what purpose need to be clear. Google fails miserably on that in that they do not tell you that they're tracking you unless you dive into their site.
Case in point: can you find the privacy policy on Google's site? It's in the footer of their About Google page. On Yahoo!, it's on every page, including the home page, albeit in the footer. Interestingly, Yahoo!'s privacy policy link gets colored red - which stands out even in the footer - when the policy changes.
Again, it's the mindset from which Google seems to be operating on that's worrying. There is no evidence to date that their kind of tracking actually produces a better search experience (however defined) or better ads (higher CTR and higher conversions). Heck, even on Google Apps - where one would store documents and spreadsheets that could be very personal - the privacy policy link is buried at the very bottom of their Program Policies page. Clearly they value the legal side of things more than privacy.
It doesn't build trust that the consumer has to jump through hoops to find out that what Google is doing when others are a little bit more accessible.
And here is another question: Ruud and others have rightly pointed out that to date there has been no serious breach of privacy. My question is that do we know what kind of safeguards are there to prevent a breach? We also don't know the full set of data points they're tracking, so can we honestly assess the potential for damage if a breach occurs?
This goes for all players, not just Google.
Pierre